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Pricing Training

It is estimated that only 3-5% of all businesses have captured the profit margins they truly deserve through their pricing schedules and policies. This statistic indicates a lot of untapped potential given the typical improvement of 2-4 points realized when a company begins approaching pricing from a strategic view. Our price consultants experience supports these findings.

Before actually conducting data analysis to definitively identify price improvement targets, examine some of the situations within your business that might be early indicators of price improvement potential. Do any of the following circumstances apply to your business?

Complex Pricing Environment – Does your business sell a large number of items or SKUs? Are there many customers and a variety of markets? The combination of these factors quickly creates a complex pricing environment. Even 500 SKUs, 500 customers and five markets creates a potential of 1.25 million different price points. How do you assure that every price for every customer is on target and within the market range? If this situation exists in your business and you are not employing pricing technology to manage pricing, you are likely leaving money on the table and losing sales due to under-optimized prices.

Sales Reps Setting Prices – Many businesses rely heavily upon the sales team to arrive at executed prices. Sales reps can have great insight into specific accounts and competitive factors. However, asking reps to rely on their own individual experience to set prices does not optimize the prices you’re receiving. What if, instead, each rep had the collective experience of the entire team of reps to set prices? A centralized pricing structure that uses historical pricing data can deliver optimized prices to every rep, helping ensure higher close rates and improved margins. If your business is relying on individual sales reps to determine prices, there is likely room for significant improvement.

Cost Plus Pricing – If your business uses a cost-plus pricing approach – that is, cost plus a pre-determined margin – then it is highly likely that you are leaving money on the table and losing sales opportunities. This is a clear signal for price improvement. Three things can happen when prices are set on a cost-plus basis, two of which are bad. In one case, the price is set lower than the customer is willing to pay and you leave valuable money on the table. In the second scenario, prices are set higher than the customer is willing to pay and you lose the sale. Finally, in the third case, the price just happens to be optimized and you realize maximum margin and close the deal. Unfortunately, this scenario happens only a fraction of the time.

If any or all of these situations exist in your business, then it is highly likely that you are underperforming in price and margin realization. Your next step is to conduct pricing data analysis to identify specific price targets. This analysis will almost inevitably reveal some low-hanging fruit that will provide a quick return on your effort and minimize any risk to your business. Then you can determine how to move forward in optimizing your pricing and maximizing your return for the long term.

If you need help in analyzing your pricing the price consultants at PricePoint Partners can help. Just give us a call and we can guide you in the right direction. Call 330-342-0923 and ask to speak with a price consultant.

We have seen well managed manufacturing and distributor companies spend a significant amount of time and money in building pricing strategies. We have also watched these companies invest heavily in technology to help them optimize prices to improve margin. All too often, these companies fail to realize the price improvement that was originally targeted.

Why? Because the execution of these strategies collapsed at the point of sale. That is, the customer facing teams were not able to fully execute. We typically see price improvement initiatives realize one quarter to one third of their targeted goals.

There are three common reasons why sales related teams often fall short.

1. The sales team was not trained on price execution strategies and techniques. Don’t assume that every sales person knows how to deal with price changes. Prices at many companies don’t change frequently enough for sales teams to build their skill set around this important activity. Provide your team with value based sales training that includes a heavy component of pricing execution. Once the sales rep has exposure to sound price implementation practices they will embrace the task and deliver.

2. Sales team incentive plans are not aligned with the pricing strategy objectives. Most sales teams today are still heavily rewarded for selling volume. Price rarely enters the situation. Look at your incentive plan. Where can you add a price realization component? Even consider a temporary reward for the duration of the price improvement initiative.

3. How well equipped is your team with data and information to support the pricing initiative? Supporting data from secondary information sources like trade associations is a great source of objective support.

Finally, address these issues well before the point of execution. In fact, consider bringing some of your forward thinking sales people into your price strategy sessions to get buy in. They will lead the sales team to successful implementation.

When distributors are planning price increases should they provide an advanced notice to their customers as part of their overall pricing strategy?

In most cases, the distributor pricing strategists at Price Point Partners find that an informal communication to your biggest and best customers helps the increase discussion go more smoothly.

Consider a verbal “heads-up” that your company is planning an increase 30 days in advance of the formal announcement. No specific details need to be presented or discussed. Simply mentioning that an increase within a certain range is coming goes a long way to getting the OK later on.

Some sales professionals believe that an advanced notice only gives buyers time to find alternative sources. We find this not to be true. Buyers are faced with price increases on a regular basis. And, many buyers are more concerned about selling the price increase to their management. Giving them some time and detailed information supporting the increase helps the buyer resolve any internal issues.

Of course, not all customers need the advanced notice. Save this only for your big accounts. Small accounts can be addressed at the time of the formal announcement and most can be addressed in writing.

Every manufacturer and distributor we have ever met has been leaking profit margin through pricing execution. Some leak just a little margin, while others are leaking a waterfall of profits that are never realized. These profit leaks are typically equal to 2 to 4 margin points – that is, $200,000 to $400,000 on every $10 million in revenue. In most cases, management is unaware of these leaks because they lack the awareness and visibility to identify where price leakage occurs.

A myriad of price leakage sources exist, including under-optimized prices, unrealized freight charges, insufficient recovery of handling costs and giveaways. You can begin to identify your leakage sources through four analyses that are relatively easy to execute provided you have access to historical pricing data taken from invoices. These simple starting points enable you to capture incremental pricing revenue that can fuel additional and more sophisticated analysis later. Starting points:

Take a careful look at negative-margin customer transactions. While most manufacturers and distributors believe that they have a handle on this issue, many are surprised to see how much business is being shipped at negative margins. We recently completed an analysis for a $100 million manufacturer who had over $250,000 in negative margin transactions. There were two choices for remediation: “fire” the customer or raise the price to an acceptable level. Either would stop the bleeding.

Extend your margin analysis to low-margin transactions. Determine the margin floor – that is, the minimum margin you are willing to accept. Identify all transactions that lie below this minimum, and adjust them to an acceptable level. Keep in mind that the margin floor is not a target; rather, it is your minimum threshold.

Small accounts are often a major source of margin leakage. Many of these accounts get low prices that should be reserved for much larger customers. Analyze which of these accounts are getting prices much lower than their peers. Look for price levels normally reserved for much larger accounts. Small accounts are rarely on management radar screen and tend to go unnoticed. Lifting prices on these accounts is low-risk and easy to execute.

Determine whether you are getting the most from high-value products. While commodity products may be the core of your business and require careful pricing attention, higher-value products that are customized or have a niche focus may be ripe for premium prices. Segment your product families into categories from commodity to high-value, and look closely at the respective pricing. Scale your price levels according to value, and ensure that your marketing and sales teams are effectively communicating the value.

Stopping price leaks can have a dramatic impact on your bottom line. And, getting started is relatively easy. For additional help in capturing margin through price leakage elimination, call the pricing experts at PricePoint Partners: 330-342-0923.

Moving a manufacturing or distributor organization toward a strategic pricing capability requires the development of skills and resources to set pricing strategy and perform analyses among a variety of other crucial elements.

A key function that is often overlooked is the sales team. This is the point where pricing strategies are executed and we rely upon the sales team to carry value messaging and price negotiations to the point of sale.

Teaching sales teams how to deal with price issues is an important first step. Get team members involved in the pricing strategy phase early in the program to get buy-in and create a clear understanding of the program objectives.

The first step the pricing training experts at PricePoint Partners teaches the sales team is about selling the economic value and its impact on profit margins. While pricing training will go a long way to helping sales professionals effectively manage price issues, there is on aspect that needs to be addressed: the issue of sales incentive plans.

If sales teams are incented on sales volume you stand practically no chance of getting them to support price improvement initiatives. Their focus will continue to be selling more volume with no attention to price or profit margin. Do you blame them?

If your sales team is incented for profit margin you are only part of the way to gaining their attention on price. Every sales professional knows that they have no control over costs and see margins as something they can only impact with volume. Little attention is paid to price.

The solution to getting the sales team to focus on price improvement is to reward them for better price performance. This is most impactful when sales professionals have the ability to impact prices through discounting.

Set price targets for each product at the beginning of a time period (i.e. at the beginning of a fiscal year). Then, track each sales rep’s actual realized price throughout the time period for each product. Reward them for achieving prices over the target level and detract from their incentive for performance under the target price level.

In the end, you will be impacting profit margins because price changes fall straight to the bottom line. And, you will be driving sales team pricing behavior in a positive direction.

The greatest challenge to any distributor pricing strategy program is getting the sales team on board. If the sales team does not buy in to the program it is likely to fail or fall well short of the intended results. This is particularly true of sales teams that are rewarded for sales volume. These programs reward higher sales volume at any cost. Sales reps are focused on getting orders at any price. Even if sold at a loss.

Rewarding sales teams on profit margin is a step in the right direction but most often falls short of the desired outcome as well. When faced with getting the order or maximizing the price, the rep will tend to reduce price instead.

The best solution is to reward the sales team on a combination of factors including volume and price. Yes, price. If your sales team has some authority to adjust price through discounting why not give them an incentive based on price?

Consider setting a baseline price for each product at the beginning of the year. Then, reward reps for achieving or exceeding the target price. Measure the difference in target price and realized price and reward the rep accordingly.

When done correctly, our team of pricing consultants typically see a rapid change in the reps attitude toward price in a positive direction. You will see less requests for price discounts and margins will improve dramatically.

Are you applying a “peanut butter” pricing strategy to your business? Put another way, are you spreading the same price for each product or service across all customers or all markets?

This approach, also called mono-price-eosis, falls short of recognizing the differences in price sensitivity across differing customers and markets. Nearly every customer perceives the value of your offering in a slightly different way. The key to optimizing prices is to recognize these differences and price accordingly. The same applies to different market segments.

Different needs and different application for the same products should warrant price differentiation. If you look at all the possible applications for your product by all the different customers you will quickly see a matrix develop that can become the foundation for an optimized pricing architecture. This is called price segmentation.

Take for example the manufacturer of candy. This company has 500 SKUs, eight different markets and 2,000 customers. In the end, after careful analysis of each of these price drivers, the company resulted in 11,000 different prices for the 500 SKUs. While this may sound complex, the user interface for the pricing system was simplified for rapid quoting and ordering.

Take it from the price consulting team at Price Point Partners, make sure to look carefully look at your pricing and determine which markets and customers can support different prices. This may be the beginning of your price optimization program.

Depending on the industry that you participate in, increasing prices may be an annual part of the industry culture or it may not. Some industries increase prices on a consistent annual basis.

These pricing strategies actually train the buyer to accept increases and reduce the push back seen in industries that change price infrequently.

The key to getting customers to accept increases lies in the preparation. Here are a few helpful hints from the pricing consultants at PricePoint Partners to making your price increase go smoothly.

If you are raising prices due to cost increases, be prepared to share your actual cost increases with the customer. However, only use this data if necessary. Present supporting cost data only after the buyer has resisted the increase.

Be sure that your sales team is well prepared for price negotiations. Equip them with several backup strategies in the event of buyer push back. If the buyer resists, consider deferring the increase for 30 days. Or, removing something from the deliverable that reduces the value of the product. Sales professionals will present price increases with confidence when they know they have a strong back up plan.

Customers don’t like surprises. Let them know that an increase is coming. This will make the announcement more palatable.

Practice your price increase presentation with smaller customers first. This gives you the chance to practice and develops confidence when it’s time to present to your biggest customers.

As in any competition, preparation is the key to getting the very best results. Take it from the pricing experts at PricePoint Partners, spend the extra time to prepare for price increases, and you will see your net realized increase improve.

We recently provided a strategic pricing training program for a $400 million manufacturing company. This company had already embraced the concept of pricing leverage and was searching for ways to execute price improvements.

During our training we discussed the power of 1%. That is, how an improvement of just 1% in price revenue could impact the financial results of any company. In the case of this client, a 1% price improvement would result in a margin lift of $4 million or nearly 8% of current income.

Further, being a publicly held company with a price-earnings ratio of nearly 20, market capitalization would rise $75 million. These are powerful numbers and the management team of this company understands the power and the prize in leveraging price.

While strategic pricing management can be complex with a myriad of data, systems, analyses and people to make it all work, it doesn’t have to be that way to get started.

Our subject client decided to add just 1% to every quote going forward. As time went on, confidence grew in their ability to get the 1% target and before long it became 2% and 3%.

At year’s end, the controller was baffled by the rise in profit margins in comparison to the previous year. The management team explained the initiative to add just 1% in price improvement.

Strategic pricing management doesn’t need to be complex to get started. While our recommendations as a pricing consulting firm are typically more sophisticated than a simple 1% price lift, you may find this easy first step generates positive results for your company.

Pricing your product offerings to value, that is, determining economic value to your customers and pricing accordingly is key to maximizing margins. However, setting a value based price is only one part of the entire value capturing process.

One of the most critical and overlooked aspects of value capture is at the point of execution. If the sales team is not selling on value, and specifically economic value, you will not likely capture full price. This results is a disconnect between price setting and execution.

Don’t expect the sales team to be successful at selling a product that is priced according to value when they are unable to articulate economic value to the customer. Without this ability the sales person will likely revert to price discounting to close the deal. Instead, train sales teams to sell on economic value and provide them with the data and tools to support the value.

Read more about our onsite business to business sales training program, Selling for Profit™, or contact sales training speaker and pricing expert, Ralph Zuponcic to explore how value based sales training can revitalize your sales efforts at 330.342.0923 and start Selling for Profit™ today!